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Volume 88, Issue 1, April 2008 ISSN 0304-405X

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Journal of Financial Economics

Journal of Financial Economics 90 (2008) 84–103

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Published by ELSEVIER in collaboration with the WILLIAM E. SIMON GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, UNIVERSITY OF ROCHESTER

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Do boards pay attention when institutional investor activists ‘‘just vote no’’?$

Diane Del Guercio a,�, Laura Seery b, Tracie Woidtke b,c

a Charles H. Lundquist College of Business, University of Oregon, Eugene, OR 97403, USA b Department of Finance, University of Tennessee, Knoxville, TN 37996, USA c Corporate Governance Center, University of Tennessee, Knoxville, TN 37966, USA

a r t i c l e i n f o

Article history:

Received 2 October 2006

Received in revised form

14 December 2007

Accepted 7 January 2008 Available online 27 August 2008

JEL classification:

G23

G30

G34

Keywords:

Shareholder activism

CEO turnover

Director reputation

Public pension funds

Director elections

5X/$ - see front matter & 2008 Elsevier B.V.

016/j.jfineco.2008.01.002

t of this paper was completed when Dian

the University of Queensland. We are espec

ous referee, Larry Dann, and Jarrad Harford

us improve the paper greatly. We also ackno

nts of Jennifer Bethel, Ro Gutierrez, Jay Hartze

n Karpoff, Angela Morgan, Wayne Mikkelson

egan Partch, Donna Paul, Jon Reuter, and P

articipants at the 2006 Western Finance As

5 Mitsui Life Symposium on Financial Ma

s: Issues in Asset Management and Go

ity of Michigan, the 2006 Vanderbilt Law Con

, the 2005 Financial Management Associa

orthwest Finance Conference, the Universit

ity, the University of Washington, the Univer

te Governance Center and Finance Departm

University of Oregon Brown Bag series for h

oidtke would like to acknowledge support f

essee’s Department of Finance and Corporate

Del Guercio would like to acknowledge

es Analysis Center at the University of Orego

responding author.

ail address: [email protected] (D. Del Gu

a b s t r a c t

We examine ‘‘just vote no’’ campaigns, a recent innovation in low-cost shareholder

activist tools whereby activists encourage their fellow shareholders to withhold votes

toward a director’s election to express dissatisfaction with management performance or

the firm’s corporate governance structure. Grundfest [1993. Just vote no: a minimalist

strategy for dealing with barbarians inside the gates. Stanford Law Review 45, 857–937]

argues that a substantial withheld vote motivates directors to take immediate action to

avoid further embarrassment. We find a variety of supportive evidence, including

operating performance improvements and abnormal disciplinary chief executive officer

(CEO) turnover, indicating that such campaigns induce boards to take actions in

shareholders’ interests. Furthermore, abnormal turnover is robust to controlling for

concurrent events and firm- and CEO-specific controls.

& 2008 Elsevier B.V. All rights reserved.

All rights reserved.

e Del Guercio was

ially grateful to an

for comments that

wledge the helpful

ll, Joan Heminway,

, Warren Neel, Tom

aula Tkac. We also

sociation meetings,

rkets ‘‘Institutional

vernance’’ at the

ference on Investor

tion meetings, the

y of Kansas, McGill

sity of Tennessee’s

ent seminar series,

elpful discussions.

rom the University

Governance Center.

support from the

n.

ercio).

1. Introduction

There has been much academic and practitioner interest in understanding the influence of shareholder activists on the corporate governance structure and valuation of target firms. Survey articles by Black (1997), Gillan and Starks (1998, 2007), Karpoff (2001), and Romano (2001) evaluate the large body of empirical evidence on this issue and primarily conclude that the main activist tool, Rule 14a-8 shareholder proxy proposals, is weak and ineffective in eliciting change and improving performance at target firms. Empirical studies, mainly of activist targetings before 1993, find little evidence of positive valuation effects and no effect on major board decisions, such as firing an underperforming chief executive officer (CEO). We revisit the effectiveness of activist efforts by examining a relatively recent innovation in shareholder activist tools, the ‘‘just vote no’’ campaign.

ARTICLE IN PRESS

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 85

‘‘Just vote no’’ campaigns are organized attempts by activists to convince their fellow shareholders via letters, press releases, and Internet communications to withhold their vote from one or more directors in an effort to communicate a message of shareholder dissatisfaction to the board. Grundfest (1993) argues that a substantial showing of withheld votes resulting from a campaign can generate enough negative publicity to induce incumbent directors to act voluntarily. He contends that directors value their reputation as monitors and therefore will negotiate with shareholders and take action to avert a public vote of no confidence. In other words, a campaign that directly targets board members could be a more effective threat than an issue-oriented shareholder pro- posal, because directors want to avoid the public embar- rassment and associated damage to their individual reputations.

Some activists contend, however, that boards will only respond if legally required to do so. Under this view, ‘‘just vote no’’ campaigns are as weak and ineffective as shareholder proposals because both are not legally binding on the board of directors. Because directors almost always run unopposed, shareholders cannot technically vote against a director, but instead can only withhold their authority to vote in favor. In the typical public corporation, only a plurality of shareholder votes is necessary to elect a director. Thus, even a majority of shareholders withholding their votes from a director would not result in her removal. Such an act would be merely a symbolic gesture that conveys shareholders’ dissatisfaction with management and the board.1

The main question of interest is whether the external pressure of a ‘‘just vote no’’ campaign is sufficient to motivate directors to act in shareholders’ interests. Evidence on this issue is important given the controversial debate on proxy rule reform concerning director elections pending as of mid-2008 at the Securities and Exchange Commission (SEC). Bebchuk (2007), among others, argues that proxy reform is necessary to increase the power of shareholders to truly exercise their right to elect (or remove) their representatives on the board of directors. Critics of this view, such as Bainbridge (2006), contend that shareholders have sufficient tools to hold directors accountable and that further shifts of power toward shareholders and away from boards will have unintended consequences and harmful effects. For example, some shareholders might abuse their increased power by pursuing alternative agendas or benefiting themselves at the expense of other shareholders.

In this paper, we assess the effectiveness of the low- cost, but nonbinding, activist tool of a ‘‘just vote no’’

1 In practice, shareholders cannot legally remove a director who fails

to act in their interest, short of waging a costly proxy solicitation contest.

A few firms have recently adopted majority voting for their director

elections. However, because majority voting rules allow a director to

remain until a replacement is found, even majority voting does not

guarantee that a director who loses an election is removed. See ISS

(2005). Reforms to the proxy rules regarding shareholder nominations in

director elections are pending as of mid-2008 at the Securities and

Exchange Commission (Wall Street Journal, November 29, 2007, p. C1).

campaign using a variety of measures of activist success from the literature. In particular, we analyze performance effects and disciplinary CEO turnover. Firing an under- performing CEO is arguably one of the most important decisions of the board, and many studies use forced CEO turnover events to assess board effectiveness, as well as to study the influence of external pressure from activists and blockholders on boards.

We examine a comprehensive sample of 112 publicly announced ‘‘just vote no’’ campaigns from 1990 to 2003, and we find they have several characteristics in common with shareholder proposals in addition to their nonbinding nature. Specifically, the typical campaign targets a large, poorly performing firm and is sponsored by a public pension fund. Although other proponent types sponsor campaigns, we observe only institutional investor proponents, and not the small individual shareholders who commonly sponsor shareholder pro- posals. Our sample contains only a handful of hedge funds, which tend to target smaller firms and employ costlier methods of activism, and thus our study is complementary to the growing literature on hedge fund activism.2

Proponents typically have broad campaign goals, commonly expressing overall dissatisfaction with firm performance or with management and board deci- sions on firm strategy, or both. Some campaigns, however, are narrowly focused on corporate governance issues, such as removing an insider from the compensation committee. Campaign proponents are typically able to garner vote support from their fellow shareholders, as the average percentage of votes withheld in the director election is 11.4%, with 21.2% of campaigns having substantial vote support (greater than 20%). By compar- ison, the average matching control firm has 4.1% votes withheld and only 1.4% of control firms have substantial vote support.

In contrast to the shareholder proposal literature, we find consistent evidence across a broad set of measures suggesting that on average campaigns are effective in spurring boards to act. The typical campaign target has significant post-campaign operating performance improvements. Moreover, we find a forced CEO turn- over rate of 25% in target firms in the 1 year following a campaign, a rate more than three times higher than the 7.5% rate for a control sample matched on sales and performance and over 12 times the annual 2% rate in the general population of firms. We find this result to be robust to controlling for a variety of firm performance and governance control variables, as well as for concurrent events, such as changes in the board of directors or external pressure from blockholders.

Further analysis reveals that the improvements in operating performance are primarily driven by the campaigns motivated by firm performance and strategy

2 See Bradley, Brav, Goldstein, and Jiang (2006), Bratton (2007), Brav,

Jiang, Partnoy, and Thomas (2008), Boyson and Mooradian (2007),

Clifford (2008), Greenwood and Schor (2008), Kahan and Rock (2007),

and Klein and Zur (2008).

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D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10386

reasons, and not by the campaigns focused on general corporate governance practices. In fact, within these campaigns motivated by firm performance and strategy reasons, we find that boards take a variety of value- enhancing actions; 31% of these targets experience disciplinary CEO turnover and 50% of the remaining targets that do not dismiss the CEO make other strategic changes. Consistent with these board actions being value-enhancing, post-campaign operating performance improvements are economically and statistically signifi- cantly higher in these subsamples of target firms. Overall, our evidence suggests that activists can be successful at disciplining managers and directors despite the nonbind- ing nature of withholding votes.

The remainder of the paper proceeds as follows. Section 2 provides background information on our sample of ‘‘just vote no’’ campaigns and their activist proponents. Section 3 describes our hypotheses, measures of campaign success, and the results of our empirical tests, while Section 4 concludes.

2. Background on ‘‘just vote no’’ campaigns

Use of ‘‘just vote no’’ campaigns as an activist share- holder tool was first proposed by Joseph Grundfest in a 1990 speech to the Council of Institutional Investors. According to Grundfest (1993), the costs of launching a ‘‘just vote no’’ campaign ‘‘verge on the trivial’’ and compare favorably even with other low-cost activity, such as sponsoring Rule 14a-8 shareholder proposals. He cites modest cost estimates by a CalPERS official and argues that campaigns avoid the legal costs associated with shareholder proposals, which require proponents to file official documents with the SEC and sometimes involve lawsuits.

Through keyword searches for variants of the words ‘‘vote no’’ and ‘‘withhold’’ in LexisNexis, Factiva, the Wall Street Journal Index, and issues of the IRRC Corporate Governance Bulletin and the ISS Post-Season Report, we identify 112 ‘‘just vote no’’ campaigns from 1990 to 2003.3 Information culled from our sample campaign announcements, as well as recent legal opinions, are consistent with low mechanical and legal costs of ‘‘just vote no’’ campaigns.4 For example, we find only seven out of 112 announcements that mention the proponent undertaking any costly activity, such as hiring a proxy solicitor, a mass mailing to shareholders, or a large ownership stake.

3 Specifically, we conduct text searches of variants of withhold

(‘‘withh!’’), ‘‘withhold authority,’’ ‘‘vote no,’’ and ‘‘vote’’ and within same

paragraph ‘‘against’’ or ‘‘director.’’ In addition, if the IRRC Corporate

Governance Bulletin or ISS Post-Season Report mentions a ‘‘just vote no’’

campaign, we conduct a press announcement search using the name of

the firm and proponent. 4 Recent legal opinions are derived from personal correspondence

with Jamie Heard, senior corporate governance adviser and formerly CEO

of ISS and from ‘‘Considerations for ‘‘Just Vote No’’ Campaigns’’ in the fall

2006 ‘‘Activist Investing Developments’’ of Schulte Roth & Zabel,

available at http://www.srz.com/publications/publicationDetail.aspx?

publicationID=1578.

2.1. Target firm characteristics and types of campaigns and

proponents

Table 1 reports summary statistics that describe campaign proponents, the reasons for the campaigns as stated in press announcements, and the frequency of campaigns over time. Consistent with the previous share- holder activism literature, proponents tend to target large, poorly performing firms (Karpoff, Malatesta, and Walkling, 1996; Smith, 1996; Strickland, Wiles, and Zenner, 1996; and Thomas and Cotter, 2007). Across all campaigns, the median market-adjusted stock return in the year prior to the campaign is �20.6%, significantly different from zero at the 1% level. The median target firm has sales in the previous fiscal year of $8.4 billion and 54% of target firms are in the top market capitalization quintile of all NYSE firms in the Center for Research in Security Prices (CRSP). In contrast, Boyson and Mooradian (2007) and Brav, Jiang, Partnoy, and Thomas (2008) report median sales of only $69 million and $163 million, respectively, in their samples of firms targeted by activist hedge funds.

‘‘Just vote no’’ campaigns, along with other activist targetings, have become more frequent over time.5 There are only 38 campaigns in the 7-year 1990–1996 period and 74 in the more recent 7-year period of 1997–2003.6

Public pension funds are the most common proponents, accounting for at least 54% (61 out of 112) of our sample campaigns. Involvement by public pension funds is actually higher than 54% because they also are co- proponents in some campaigns that are jointly sponsored with other proponent types (17%). The joint sponsorship category indicates that two or more separate investor groups are in agreement about their dissatisfaction with the board or management.

From Panel A of Table 1, public pension funds show the greatest tendency among all proponent types to target large firms with poor stock performance. The investment group category, which includes mutual fund managers, private investors, and a handful of hedge funds, covers 13% of campaigns. The target firms in this proponent type are significantly smaller in size than the rest of the campaign sample, although still much larger in size than the target firms reported in the hedge fund activism literature. The category ‘‘other’’ contains proponents with too few campaigns to warrant a separate category including union pension funds, TIAA-CREF, and proxy consultants such as ISS, Glass, Lewis & Co, and Proxy Monitor.7 Overall, ‘‘just

5 For example, Gillan and Starks (2000) report that shareholders

submitted 309 corporate governance proposals in 1994 while Georgeson

reports the corresponding figure to be 723 in 2003. Brav, Jiang, Partnoy,

and Thomas (2008) report that hedge fund targetings increase mono-

tonically from 2001 to 2006. 6 ‘‘Just vote no’’ campaign activity continues to occur up to the

present. For example, recent articles in the Wall Street Journal discuss

2007 proxy season campaigns at FedEx (September 12, 2006, p. A15),

Verizon (April 25, 2007, p. A2), International Paper (May 8, 2007, p. B7),

and Yahoo (June 13, 2007, p. A2). 7 Proxy advisory services have been shown to be increasingly

influential with investors. See Bethel and Gillan (2002), Cai, Garner,

and Walkling (2007), and Alexander, Chen, Seppi, and Spatt (2006).

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Table 1 ‘‘Just vote no’’ campaign target firms by time period, proponent type, and stated reasons

This table reports the mean and median values of firm characteristics for ‘‘just vote no’’ campaign target firms by time period, by proponent (sponsor)

type, by reason stated in the news article announcing the campaign, and by campaign type. We identify firms targeted by a ‘‘just vote no’’ campaign from

1990 to 2003 through searches of LexisNexis, Factiva, the Wall Street Journal Index, IRRC Corporate Governance Bulletins, and ISS Post-Season Reports.

A campaign is included in the public pension fund category if the proponent or co-proponents are all public pension funds. The investment group category

contains mutual fund managers, private investor groups, and hedge funds. The ‘‘other’’ proponent type includes union pension funds, TIAA-CREF, proxy

advisory services including ISS, Glass, Lewis & Co., and Proxy Monitor, and an unknown proponent. Joint sponsorship indicates that the campaign is jointly

sponsored by more than one of the three proponent types. Stated reasons are put into three categories according to the reason given in the press

announcement of the campaign. The first category contains targets in which the proponent expressed dissatisfaction with firm performance or

management’s decisions or strategies. The second category refers to the proponent specifically pointing to a Rule 14a-8 proposal that has received

majority shareholder voting support but was not implemented by the board. The board or director lacks independence or proper oversight category is

either that there are too many insiders or gray members on the board, that a particular director has ties to management or conflicts of interest that

compromise her independence, that an insider serves on a committee that the proponent believes should be served by independent directors, or that a

director’s commitment to proper oversight is criticized (e.g., poor attendance at board meetings). We classify a campaign as focused if specific individual

directors are named in the campaign, or if only members of a certain board committee, such as audit or compensation, are targeted. We classify all other

types of campaigns as broad-based. The prior 1-year market adjusted returns are the compounded monthly returns for the firm for the 12 months ending

the December before the campaign year less the compounded monthly returns for the Center for Research in Security Prices value-weighted market index

for the corresponding period. Sales are from Compustat as measured in the fiscal year-end prior to the annual meeting. ***, **, and * (a, b, and c) indicate

that the mean (median) is significantly different from zero at the 1%, 5%, and 10% level, respectively. P-values in the fourth and sixth columns indicate the

results of a two-sided t-test for differences in means and a Wilcoxon rank sum test for differences in the medians of targets in a particular row to that of

targets in all other rows within the same grouping (e.g., mean prior 1-year market-adjusted performance of targets of public pension fund proponents

relative to that of all targets of other proponent types).

Panel A. Characteristics of campaign target firms

N Prior 1-year

market-adjusted

performance

(percent)

P-value for difference in mean

(median) market-adjusted

performance between

subsample versus rest of sample

Prior fiscal year-

end sales

(millions of

dollars)

P-value for difference in

mean (median) sales

between subsample

versus rest of sample

All campaigns 112 �8.9* 17,727.2

(�20.6)a (8,359.4)

Year of campaign

1990–1996 38 �11.5** 0.72 14,878.6 0.44

(�11.2) b (0.64) (5,009.9) (0.47)

1997–2003 74 �7.5 19,190.0

(�25.4)a (8,395.0)

Proponent type

Public pension fund 61 �14.8*** 0.22 21,963.7 0.08

(�21.0)a (0.59) (10,384.1) (0.02)

Investment group 15 �4.8 0.76 7,125.9 0.11

(�11.3) (0.88) (2,152.3) (0.00)

Joint sponsorship

(multiple types)

19 9.9 0.10 20,890.3 0.59

(�3.9) (0.53) (15,182.0) (0.27)

Other 17 �12.4 0.78 8,344.7 0.13

(�23.2) (0.82) (3,299.6) (0.11)

Proponents’ stated reason for campaign

Overall dissatisfaction

with management or

board or both

66 �17.1*** 0.06 14,506.8 0.15

(�22.8)a (0.05) (5,942.7) (0.06)

Board ignored a majority

vote on one or more

shareholder proposals

20 �26.2*** 0.12 10,985.7 0.24

(�28.9)a (0.08) (4,864.2) (0.69)

Board or director lacks

independence or proper

oversight

26 25.3 0.00 31,087.9 0.01

(13.0) (0.00) (18,464.0) (0.01)

Campaign type

Broad-based 83 �16.9*** 0.01 17,676.2 0.97

(�22.5)a (0.04) (8,335.7) (0.57)

Focused 29 14.1 17,873.2

(�3.9) (13,831.0)

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 87

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Panel B. The number of campaigns by stated reason, proponent type, and campaign type

Proponent type Campaign type Total

Public pension fund Investment group Multiple type Other Broad-based Focused

Proponents’ stated reason

Overall dissatisfaction 32 12 11 11 50 16 66

Board ignored a majority vote 14 2 2 2 19 1 20

Board or director lacking 15 1 6 4 14 12 26

Campaign type

Broad-based 48 13 11 11 83

Focused 13 2 8 6 29

Total 61 15 19 17 83 29 112

Table 1 (continued)

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10388

vote no’’ campaign proponents tend to be institutional investors. In contrast to shareholder proposals, none of the campaigns in our sample is sponsored by individuals.8

We classify campaigns into three distinct proponent’s stated reason categories based on the information con- tained in the campaign press announcement. In the majority of campaigns (59%) proponents express overall dissatisfaction with firm performance or with manage- ment and board decisions on firm strategy, or both. Some proponents call for specific actions ranging from the sale of the firm to firing the CEO, while others complain more generally about poor performance and a lack of account- ability to shareholders. As an example of the latter, one-third of the campaigns in this category protest that boards awarded high executive pay despite poor stock performance. Consistent with this category capturing general shareholder dissatisfaction, the mean and median market-adjusted return is negative and significantly different from zero at the 1% level, as well as being significantly different from the target firms in the other stated reason categories.

Another common stated reason accounting for 18% of campaigns is that the board previously ignored a precatory shareholder proposal that received a majority of shareholder voting support. Board response to majority votes on shareholder proposals has been a controversial issue among activists, regulators, and corporate govern- ance experts.9 Activists argue that boards that ignore a majority shareholder vote reveal themselves to be behol- den to management and unaccountable to the share- holders they represent. A counterargument expressed by Brownstein and Kirman (2004) is that the board has a

8 Thomas and Cotter (2007) report that 37% of shareholder proposals

in the 2002–2004 proxy seasons are sponsored by individuals. Gillan and

Starks (2000) report a corresponding number of 63% for the 1987–1994

proxy seasons. 9 Ignoring majority votes has been a priority issue at the Council of

Institutional Investors since 1998. It has tracked majority votes and

board responses to these votes on its website and in its annual report to

members. (See 2006 annual report at www.cii.org.) In addition, the SEC

in 2004 considered amending the proxy rules to make an ignored

majority vote one of the conditions that triggers the requirement that

shareholders are allowed to nominate a director candidate directly on

the corporate proxy statement.

fiduciary duty to implement only changes that are in shareholders’ interests, not govern the firm by referendum, as the board arguably has better information than share- holders about what governance structure is value- maximizing. In our sample, the topic of the passing shareholder proposals is the removal of a takeover defense (poison pill or classified board). In some cases the same proposal passed several years in a row without generating a board response. The median 1-year stock performance of this category is �29%, significant at the 1% level. Together, these facts provide some support for the activists’ view.

The final stated reason category contains targets in which proponents question the ability of the firm’s board of directors to provide proper oversight (23% of targets). In some cases, the proponent mentions specific directors with conflicts of interest that compromise their indepen- dence, or the proponent requests that a particular insider resign from committees that they believe should be served only by independent directors, such as the nominating and compensation committees. In other cases, the proponent complains more generally about the lack of board independence. This category of campaign tends to be more about general corporate governance practices than about firm-specific performance, as evidenced by the positive median market-adjusted stock performance of 13% that is significantly different from the performance of targets in the other two stated reason categories.

We also draw a distinction between campaigns that target the entire board versus specific individual directors. We classify a campaign as broad-based if votes were encouraged to be withheld from all directors up for election and as focused if the campaign targets individual directors by name. For example, a focused campaign might call for the resignation of a specific director with a conflict of interest or target only directors on the compensation committee for approving a generous pay package for the CEO despite poor performance. Grundfest (1993) advises against targeting individual directors ‘‘because the board as a whole bears responsibility for underperformance, and the board as a whole should suffer its consequences’’ (p. 906). The vast majority of campaigns are of the type advocated by Grundfest, with only about a quarter of the campaigns specifically targeting a subset of a firm’s directors.

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D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 89

Panel B of Table 1 reports the cross-tabulation of the number of observations in each subsample. Although public pension funds are the leading proponent in the sample overall, they especially dominate the category of the board ignored a majority vote (70% of this category). Panel B also shows that investment groups tend to focus on firm performance and strategy issues and shy away from corporate governance issues, as well as avoiding naming individual directors in focused campaigns. Over- all, Panel B shows that the substantial overlap in campaign type, proponent type, and stated reason likely inhibits any efforts to isolate the effect of proponent type independent of stated reason category.

2.2. Shareholder response to ‘‘just vote no’’ campaigns: stock

price reaction and withheld vote support

Two outcomes with direct connections to the cam- paign are the stock price reaction to the campaign press announcement and the vote outcome at the annual meeting. Stock returns are a natural measure to examine given that we find that poor stock performance is a precursor to the typical campaign. Conceptually, the stock price reaction captures the market’s ex ante assessment of the net impact of a campaign. However, as with the measurement difficulties of announcement effects in other forms of activism, imprecisely identified or missing event dates render this evidence less informative and reliable.10 Nonetheless, we report 2-day announcement cumulative abnormal returns (CARs) in Table 2 Panel A for completeness.

We conduct a standard event study using the earliest press announcement of the campaign as event date 0, using only those that appeared prior to the target firm’s annual meeting. We estimate market model parameters over the 200-day period ending 50 days prior to the announcement, although our inferences do not change if we use a post-announcement estimation period. Table 2, Panel A contains average and median CARs over the 2-day announcement period (�1, 0) and the percentage of positive CARs for the 69 campaigns with press announce- ments prior to the annual meeting date and the 48 clean announcements with no other news in the event win- dow.11 The table header contains a description of the tests we use to assess statistical significance. We find a small positive average (median) stock price reaction of 0.31% (0.68%) to the press announcement in the full sample and of 0.85% (0.93%) in the subsample of clean announce- ments, but these are at best marginally significant.

Similar to votes in favor of a shareholder proposal, the percentage of votes withheld in the directors’ election is

10 See, for example, Bizjak and Marquette (1998), Del Guercio and

Hawkins (1999), Prevost and Rao (2000), Gillan and Starks (2000), and

Romano (2001) for elaboration on why event studies in this literature are

problematic. 11 Thus, 21 targets have other news in the event window, six of

which are earnings announcements, five are additional news on the

firm’s poor prospects including top executive resignations and disap-

pointing sales and profits, eight are various firm-specific events such as

contract awards, settled class action suits, and major asset sales, and two

are an equity issuance and a debt retirement.

immediately observable to management and the board, and it is a measure of shareholder support for the campaign. The 1992 SEC proxy reforms required compa- nies to disclose the votes withheld for each director up for election in their 10-Q filing (Grundfest, 1993). We compute the percentage of votes withheld for each director and use the maximum across directors as the firm-level measure of votes withheld. We use the max- imum as opposed to the average value because some campaigns focus on only one director.

Panel A of Table 2 reports that the median percentage of votes withheld is 5.8%, and 21.2% of campaign firms have a substantial showing of campaign support, as measured by a withheld vote greater than 20%. Vote support is higher toward the end of the sample period. For the 2000–2003 period (not separately reported), the median percentage votes withheld is 12.6%, and 34% of campaigns have substantial vote support (greater than 20%). As a comparison, ISS (2005) reports that in the 2004 proxy season the median withheld vote across Russell 3000 companies is 3%, and 11.8% of Russell 3000 companies had a withheld vote greater than 20%. Thus, withheld vote support is substantially larger in firms with a ‘‘just vote no’’ campaign relative to the population of Russell 3000 firms in 2004, suggesting that proponents garner higher vote support from other shareholders when they sponsor a campaign. We confirm this inference in Section 3.3.1 by comparing the votes withheld with those of matching control firms.

2.3. Board response to specific activist campaign requests

While most proponents complain broadly about poor performance instead of requesting a specific action by the board (52%), we are able to identify 54 campaigns in which the proponent requests one or more specific and measurable actions, such as de-classifying the board or removing the CEO from the compensation committee. The ratio of broad-to-specific requests is surprisingly similar to that reported by Brav, Jiang, Partnoy, and Thomas (2008) in their sample of hedge fund activists. They report that in 48% of their sample the activists state broad reasons for targeting, such as ‘‘the company is under- valued’’ or the activist ‘‘can help the manager maximize shareholder value.’’

Table 2, Panel B contains a summary of whether the board responded to these specific activist requests in a timely manner. Because we later look at CEO turnover separately, we exclude activists’ requests to change top management. Consequently, this panel primarily reports whether the board complied with activists’ requests by making a specific corporate governance change. We find that the board implements 22% of proponents’ specific requests completely and an additional 15% partially, within 1 year of the annual meeting in the campaign year. We find that the board implements all specific requests in 36% of target firms with a substantial (greater than 20%) withheld vote, suggesting that a strong showing of withheld support increases the probability that the board will comply with activists’ requests. By comparison,

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Table 2 Shareholder and board response to ‘‘just vote no’’ campaigns

The first two rows in Panel A contain average abnormal returns for campaign announcements that we identify from the earliest press announcement in

the Lexis-Nexis and the Wall Street Journal archives. We estimate market model parameters in the 200-day period ending 50 days prior to the

announcement. We report average cumulative abnormal returns (CARs) in the 2-day announcement period (�1, 0) for all press announcements and for

those with no other news in the event window (designated as clean only). Median CARs are in parentheses and the percentage of CARs that are positive

are in square brackets. ***, **, and * indicate the mean is significantly different from zero at the 1%, 5%, and 10% level, respectively, using the cross-sectional

t-statistic of Boehmer, Musumeci, and Poulsen (1991) to control for event-induced increase in the variance of the abnormal returns around the

announcement. a, b, and c indicate the mean is significantly different from zero at the 1%, 5%, and 10% level, respectively, using the standardized residual

test in Patell (1976). We obtain the number of votes withheld for each director up for election at the annual meeting from the 10-Q Securities and

Exchange Commission (SEC) filing, and compute the percentage of the votes cast that are withheld for each director. We then use the maximum value

across all directors on the board as our firm-level measure of the percentage of votes withheld. We report the mean value across ‘‘just vote no’’ campaign

firms, and the median is in parentheses.

For Panel B, we identify 54 firms in which the proponent requests one or more specific and measurable actions by the board, such as de-classifying the

board or removing the chief executive officer from the compensation committee. We search SEC filings and press releases for each firm to determine the

outcome of each request. We define a targeting in which the board implements all specific requests as a complete implementation and a partial as one in

which the board implements at least one of the specific requests, within 1 year of the annual meeting in the campaign year.

Panel A. Stock price reaction at the announcement of a ‘‘just vote no’’ campaign and withheld voting support in director elections at targeted firms

‘‘Just vote no’’ campaign firms

Campaign press announcement 0.31%

CAR (�1, 0) (0.68)

n ¼ 69 [56.5]

Campaign press announcement (clean only) 0.85%*

CAR (�1, 0) (0.93)

n ¼ 48 [58.3]

Percentage votes withheld 11.4%

n ¼ 104 (5.8)

Percentage of firms with greater than 20% withheld vote 21.2%

n ¼ 104

Panel B. Frequency of board implementing the specific change requested by the proponent within 1 year of the campaign

N (percent of all

campaigns)

Complete Partial

Board implements all requests

(percent of requests)

Board implements some requests

(percent of requests)

Proponent makes one or more

specific requests

54 12 8

(48%) (22%) (15%)

Votes withheld greater than 20% 14 5 0

(13%) (36%) (0%)

Board ignored a majority vote on

one or more shareholder proposals

stated reason for campaign

20 3 1

(18%) (15%) (5%)

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10390

Brav, Jiang, Partnoy, and Thomas (2008) report an implementation rate of 45% in a sample of hedge fund targets.12 The higher implementation rate for hedge fund activism is not surprising given their relatively large ownership stakes and the higher cost activity they undertake.

12 Brav, Jiang, Partnoy, and Thomas (2008) report an overall

implementation rate of 66% in Table 1 of their paper, but they include

implementation by the board beyond 1 year. The authors kindly provide

a rate more comparable to ours, which requires the board to comply

within 1 year and is in the subcategory of governance issues. This is the

number we report in the text.

Given the controversy surrounding boards that ignore majority votes in favor of shareholder proposals, we separately report the implementation rate for the sub- sample of campaigns with this stated reason. We find that the board implements 20% of these specific requests, well below the 37% in the full sample. Using information from the Council of Institutional Investors’ website that lists all shareholder proposals receiving majority vote support from 1998 to 2003, as well as whether or not the firm adopted the proposal within 1 year (e.g., redeem the poison pill as requested), the implementation rate among all majority vote proposals is 12% (55 out of 405). Thus, either activists selectively launch campaigns in those

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D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 91

ignored majority vote firms in which the board is more likely to finally comply or the campaign itself provides a modest boost in the probability that the board will remove a takeover defense, as typically requested by these proposals.

3. Empirical analysis

The main question of interest is whether ‘‘just vote no’’ campaigns are an effective low-cost activist tool, affording activists sufficient leverage over boards to motivate them to act in shareholders’ interests. Testing this empirically requires a definition of effectiveness or the ability of activists to prod boards into making value-increasing changes. The previous shareholder proposal literature uses a variety of definitions of effectiveness and activist success, including wealth and operating-performance effects and changes in operations or top management. We examine each of these measures in turn.

3.1. Is a symbol enough?

Grundfest (1993) argues that ‘‘just vote no’’ campaigns might be necessary when directors ‘‘experience insuffi- cient internal guilt over the corporation’s poor perfor- mance and thus need to be motivated by external shame’’ (p. 928). Grundfest’s main premise is that directors care about their reputations, and thus the symbolic gesture of withholding votes could be enough of an embarrassment to shame the board into taking overdue disciplinary action. We posit that ‘‘just vote no’’ campaigns are one way for activist investors to alert other shareholders to a director’s poor performance as a monitor or to prod the director into action to avoid further damaging her reputation. Directors’ motivation to preserve their reputa- tions could stem from a desire to attract invitations to serve on additional boards or retain existing directorships, along with the accompanying prestige and compensation (Fama, 1980; Fama and Jensen, 1983), or from a perception that criticism of their board oversight damages their public image or social standing among their peers (Grundfest, 1993; Dyck and Zingales, 2002).13

3.2. Measure of campaign success: operating performance

improvements

The most compelling case for whether ‘‘just vote no’’ campaigns are sufficient to motivate directors to act in shareholders’ interests is if they are associated with improved performance at target firms. We emphasize operating performance improvements as a primary mea- sure of effectiveness, given the measurement difficulty with event study returns. In this subsection, we examine

13 Evidence that directors’ lax monitoring or alignment with

management is followed by a significant loss of other public company

directorships includes Kaplan and Reishus (1990), Gilson (1990),

Brickley, Coles, and Linck (1999), Coles and Hoi (2003), Harford (2003),

Srinivasan (2005), and Fich and Shivdasani (2007). Dyck and Zingales

report anecdotal evidence regarding harmful effects on public image or

social standing.

changes in operating performance surrounding campaigns overall, and by subsamples of stated reason and propo- nent type, as well as of shareholder vote support and board response, as examined in Section 2.3.

We report the change in adjusted operating return on assets (OROA) from year �3 to year �1 as a measure of prior operating performance, where year 0 is the ‘‘just vote no’’ campaign proxy year. The post-campaign operating performance change is defined as the change in adjusted OROA from year �1 to year +3. We also report the level of OROA in year �1 as a reference point. We report two measures of changes in adjusted operating performance, industry-adjusted and industry- and perfor- mance-adjusted. Including both measures presents a fuller picture of abnormal performance changes both before and after the campaign.

Following Huson, Malatesta, and Parrino (2004), we measure industry-adjusted OROA as the change in operating return on assets for a firm less the median value for all firms in the same primary two-digit standard industrial classification (SIC) industry. We define OROA as the ratio of operating income (Compustat data item 13) to beginning period assets (Compustat data item 6). To control for potential mean reversion in accounting returns for poorly performing firms, we follow the methodology of Barber and Lyon (1996) to compute changes in industry- and performance-adjusted OROA.

Specifically, we define industry- and performance- adjusted OROA as each target firm’s OROA less the OROA of a nontargeted firm, matched on primary two-digit SIC industry and with the closest OROA in the previous year. If no firm in the same two-digit industry has a year �1 OROA within 10%, we first select the firm in the same one- digit industry, and then disregard industry and select the closest year �1 OROA match. We find the closest performance-match firm to be the most well-specified method in the pre-campaign period, but our post- campaign results are not sensitive to using alternative matching criteria.14 That is, both year �1 OROA and changes in prior operating performance tend to be most similar between target firms and their industry- and performance-matched control firms under this method, suggesting an appropriate pre-campaign performance match. For the pre-campaign period, we emphasize the change in industry-adjusted OROA, as this measure high- lights the target firms’ performance relative to their industry peers, whereas the other measure shows similar performance by design. Given that we find poor abnormal pre-campaign performance, we emphasize the change in industry- and performance-adjusted performance for the post-campaign period of most interest, as suggested by Barber and Lyon (1996).

The first four rows of Table 3 contain the results on the change in adjusted operating performance around cam- paigns overall, and by the proponent’s stated reason for

14 For example, if we instead subtract the median change in OROA of

all matching firms using the same 10% cutoff rule, we find similar results

in the post-campaign period. However, we find many more changes in

industry- and performance-adjusted OROA to be significant in the pre-

campaign period, suggesting that the closest-firm method is preferable.

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Table 3 Change in operating return on assets (OROA) surrounding ‘‘just vote no’’ campaign announcements by stated reason, proponent, and outcome of the

campaign

We use a definition similar to Huson, Malatesta, and Parrino (2004) and calculate industry-adjusted OROA as each target firm’s OROA less the two-digit

Standard Industrial Classification (SIC) industry median. We follow Barber and Lyon (1996) and calculate industry- and performance-adjusted OROA as

each target firm’s OROA less the OROA of a nontargeted firm, matched on primary two-digit SIC industry and with the closest OROA in the previous year. If

no firm in the same two-digit industry has a year �1 OROA within 10%, we first select the firm in the same one-digit industry, and then disregard industry

and select the closest year �1 OROA match. The first two columns contain average change in both industry-adjusted and industry- and performance-

adjusted OROA from 3 years to 1 year prior to the annual meeting in the year of the campaign. The third column contains the level of OROA in the year

prior to the annual meeting of the year of the campaign. The last two columns contain the average change in both industry-adjusted and industry- and

performance-adjusted OROA from 1 year before to 3 years after the annual meeting in the year of the campaign. The medians are in parentheses and the

percentage positive are in square brackets. ***, **, and * (a, b, and c) indicate significantly different from zero at the 1%, 5%, and 10% level, respectively,

using a two-tailed means test and a Wilcoxon sign rank test for the medians. The last column reports P-values of a Wilcoxon sign rank test for the

difference in medians for the industry- and performance-adjusted change in OROA and, in parentheses, for the industry-adjusted change in OROA.

Change in operating return on assets P-value for difference in

medians for subsample

versus rest of sample for

Column 4 (Column 5)

Industry- and

performance-

adjusted

Industry-adjusted Level of OROA Industry- and

performance-

adjusted

Industry-adjusted

1 2 3 4 5

(year �3 to �1) (year �3 to �1) (year �1) (year �1 to +3) (year �1 to +3)

(1) All ‘‘just vote no’’ campaign

target firms

�1.15 �1.63* 12.47 3.22** 1.80*

(0.03) (�0.78) (11.65) (1.03) c (0.59)

[50.0] [44.2] {n ¼ 111} [57.8] [52.9]

{n ¼ 104} {n ¼ 104} {n ¼ 102} {n ¼ 102}

By stated reason 0.26 �2.93** 9.95 4.46*** 4.65*** 0.08

(2) Overall dissatisfaction with

management or board or

both

(0.54) (�2.06)b (9.50) (1.89)a (3.17)a (0.00)

[51.7] [32.8] {n ¼ 65} [63.8] [65.5]

{n ¼ 58} {n ¼ 58} {n ¼ 58} {n ¼ 58}

(3) Board ignored a majority

vote on one or more

shareholder proposals

3.21* 4.30*** 18.53 1.08 �0.95 0.46

(2.41) (3.55)a (16.49) (0.61) (�1.43) (0.15)

[55.0] [80.0] {n ¼ 20} [52.6] [36.8]

{n ¼ 20} {n ¼ 20} {n ¼ 19} {n ¼ 19}

(4) Board or director lacks

independence or proper

oversight

�7.63** �3.26 14.13 1.95 �2.71 0.17

(�1.17) c (�0.19) (11.52) (�0.17) (�2.11) (0.02)

[42.3] [42.3] {n ¼ 26} [48.0] [36.0]

{n ¼ 26} {n ¼ 26} {n ¼ 25} {n ¼ 25}

By proponent type 2.20 �1.53 8.86 0.23 3.99 0.52

(5) Investment group (�0.06) (�1.51) (12.23) (0.64) (0.59) (0.46)

[50.0] [35.7] {n ¼ 14} [58.3] [66.7]

{n ¼ 14} {n ¼ 14} {n ¼ 12} {n ¼ 12}

(6) Joint sponsorship (multiple

types)

�4.97 �2.53 14.70 0.17 �0.23 0.26

(�0.24) (�1.63) (16.47) (�1.49) (1.04) (0.30)

[44.4] [38.9] {n ¼ 19} [50.0] [55.6]

{n ¼ 18} {n ¼ 18} {n ¼ 18} {n ¼ 18}

(7) Public pension fund (all

targets)

�0.87 �1.32 12.38 3.55* 1.09 0.51

�0.67 (�0.43) (10.63) (0.61) (�0.60) (0.33)

[52.7] [45.5] {n ¼ 61} [52.6] [43.9]

{n ¼ 55} {n ¼ 55} {n ¼ 57} {n ¼ 57}

(8) Public pension fund (sub-

sample of overall

dissatisfaction stated reason

targets)

1.01 �5.81*** 7.66 5.32** 4.40** 0.14

(1.10) (�2.74)a (7.07) (0.91) c (2.90) b (0.01)

[57.7] [19.2] {n ¼ 32} [58.6] [62.1]

{n ¼ 26} {n ¼ 26} {n ¼ 29} {n ¼ 29}

(9) Public pension fund (sub-

sample of all other targets)

�2.56 2.71* 17.59 1.71 �2.35

(�0.28) (1.62)a (16.49) (�0.31) (�2.28) c

[48.3] [69.0] {n ¼ 29} [46.4] [25.0]

{n ¼ 29} {n ¼ 29} {n ¼ 28} {n ¼ 28}

By campaign outcome �8.02 �4.52* 14.67 1.68 �0.76 0.65

(10) Targets that adopt the

specific change requested

by the proponent

(�1.27) (�2.67) (15.06) (0.65) (0.76) (0.80)

[31.6] [36.8] {n ¼ 20} [55.6] [55.6]

{n ¼ 19} {n ¼ 19} {n ¼ 18} {n ¼ 18}

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10392

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Table 3 (continued )

Change in operating return on assets P-value for difference in

medians for subsample

versus rest of sample for

Column 4 (Column 5)

Industry- and

performance-

adjusted

Industry-adjusted Level of OROA Industry- and

performance-

adjusted

Industry-adjusted

1 2 3 4 5

(year �3 to �1) (year �3 to �1) (year �1) (year �1 to +3) (year �1 to +3)

(11) Targets with greater than

20% withheld vote support

�4.10 �2.88 12.29 3.90* 2.12 0.28

(�0.40) (�1.10) (12.75) (3.12) c (2.43) (0.64)

[45.0] [45.0] {n ¼ 21} [72.2] [66.7]

{n ¼ 20} {n ¼ 20} {n ¼ 18} {n ¼ 18}

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 93

the campaign. Consistent with poor prior stock price performance, the average target firm experiences a decline in operating performance relative to their industry peers in the 2 years prior to a ‘‘just vote no’’ campaign. The performance decline is most pronounced among targets in the overall dissatisfaction stated reason cate- gory. The mean and median prior changes in operating performance of this category are significantly negative at the 5% level, as well as the median being significantly different from those in the other stated reason categories (not reported). In contrast, firms in the ignored majority vote category have a somewhat puzzling positive and significant mean and median change in industry— adjusted operating performance prior to the campaign, even though their stock has underperformed the market (Table 1).

When examining the change in operating performance from 1-year prior to 3 years after the campaign, we find that the average (median) campaign is associated with an improvement of 3.22 (1.03) percentage points in adjusted operating performance, significant at the 5% (10%) level. Once again, firms targeted specifically because of overall dissatisfaction with firm performance or management strategy stand out relative to other categories. These targets experience an improvement of 4.46 percentage points at the mean and 1.89 at the median, both significantly different from zero at the 1% level. In addition, 64% of the changes in adjusted OROA are positive in this category, and the median change is significantly different from those of the other stated reason categories at the 8% level.

In contrast, the other two campaign categories that tend to be more about corporate governance practices than about firm-specific performance experience no measurable improvement in operating performance.15

These two subsamples are the only ones in Table 3 to have mean or median changes in pre-campaign industry- and performance-adjusted OROA that are significantly different from zero. The fact that their post-campaign changes in operating performance are insignificant sug- gests that our overall results are not driven by these potentially poorly matched observations.

15 In a recent paper, Bhagat and Bolton (2007) report a robust

negative relation between board independence and future operating

performance in a large panel of firms.

Rows (5)–(7) of Table 3 contain subsample results by proponent type. The pre-campaign change in industry- adjusted OROA is negative but insignificant in the three categories of proponent types. In the post-campaign period, only targets of public pension fund proponents show any, albeit statistically weak, signs of performance improvement. Only the mean, but not the median, operating improvement of 3.55 percentage points is significant at the 10% level. Given our earlier finding that the strongest and most consistent results are in the overall dissatisfaction stated reason category, we divide public pension fund targets into those with this stated reason and those targeted for other reasons, which approximately divides this sample into halves. Finer partitions of the other proponent types are not meaningful due to small sample size.

The effectiveness of targeting by public pension funds is of particular interest given that they are the most common campaign proponent and that the literature has found mixed evidence on their influence on target firms. Romano (1993), Murphy and Van Nuys (1994), and Woidtke (2002) find evidence supporting the argument that public pension funds are misguided or politically motivated and are often more concerned with generating publicity for themselves than with maximizing share- holder wealth. In contrast, Del Guercio and Hawkins (1999), Wu (2004), Barber (2006), and Chen, Harford, and Li (2007) find evidence supporting positive effects of pension fund monitoring on target firms.

In the subsample of public pension fund targets in the overall dissatisfaction stated reason category, we find results that mirror the full sample of targets in this stated reason category in both the pre- and post-campaign periods. Specifically, Rows (8) and (9) in Table 3 show that public pension fund targets in the overall dissatisfac- tion stated reason category have economically and statistically significant mean and median declines in industry-adjusted OROA in the pre-campaign period. In addition, the median pre-campaign change in adjusted OROA is negative and significantly different than that of firms targeted by public pension funds for other stated reasons at the 1% level (not reported).

Similar to the overall dissatisfaction stated reason subsample, the mean post-campaign operating improve- ment is 5.32 percentage points and the median is 0.91, both significantly different from zero at the 10% level or better, with 59% of this sample having a positive change in

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16 In 11 firms we are able to find a close performance match by

relaxing the 25% sales cutoff. However, in an additional seven firms we

are still unable to find a close performance match (within 25%).

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10394

adjusted OROA. In contrast, public pension fund targets in other stated reason categories do not have significant operating improvements, although the medians in the two subsamples are only significantly different at the 14% level. These results suggest that the reason for the weak improvement among public pension fund targets is their tendency to target some firms due to overall dissatisfaction and others for general governance-issue reasons and that only those for overall dissatisfaction reasons experience operating improvements on average. This could explain the mixed evidence in the literature, as we find that the overall impact of pension fund targeting depends on which type of targeting activity dominates in the sample.

Finally, Rows (10) and (11) of Table 3 contain subsamples by campaign outcome: board response and vote support. In the pre-campaign period, the subsample of targets complying with activists’ specific corporate governance issue requests have significant mean declines in operating performance relative to their industry peers, although the median is not significant. These targets do not, however, show signs of significant improvement post- campaign, as the change in adjusted OROA is not significantly different from zero. In contrast, for the mean (median) targeted firm with a substantial percentage of votes withheld (greater than 20%) we find a relatively large increase in adjusted operating performance of 3.9 (3.12) percentage points, both significant at the 10% level. Furthermore, 72% of targets in this category have positive operating improvements post-campaign.

In sum, we find significant operating improvements in campaign firms generally and, in particular, in the overall dissatisfaction stated reason category. Thus, while share- holders appear to benefit in the form of improved target operating performance when activists target firms for firm-specific performance reasons, we find no support for shareholders benefiting from activist targeting for general corporate governance reasons, including the cases in which boards comply with the activist’s specific request.

3.3. Alternative measure of campaign success: disciplinary

CEO turnover

Given that the typical target firm tends to be both poorly performing and one in which activists have broadly questioned the decisions, strategy, and accountability of management, a natural measure of the success of ‘‘just vote no’’ campaigns is whether they are associated with abnormal disciplinary CEO turnover. We might expect a major change in top management to be welcome news to shareholders given the results of Denis and Denis (1995) and Huson, Malatesta, and Parrino (2004), who find disciplinary CEO turnovers to have significantly positive announcement returns and large positive operating im- provements. In addition, by examining this measure, the effectiveness of campaigns can be compared with the previous literature on shareholder proposals: Smith (1996), Karpoff, Malatesta, and Walkling (1996), and Del Guercio and Hawkins (1999) find no relation between CEO turnover and firms targeted with a shareholder proposal.

According to Grundfest (1993), ‘‘the ‘acid test’ of the corporate governance process, and of a board’s independence

and strength of will, is its readiness to fire an under- performing CEO’’ (p. 877). Several studies find that disciplinary CEO turnover is often associated with ex- ternal pressure, rather than a result of effective board monitoring. Denis and Denis (1995) report that the vast majority of forced management turnover in their sample occurs only after prolonged periods of declining perfor- mance and appears to be preceded by external pressure from blockholders, raiders, or creditors. Parrino, Sias, and Starks (2003) find that declines in institutional ownership precede forced CEO turnover, suggesting that boards are more likely to act when faced with institutional selling pressure. These studies suggest that boards, left to their own devices, fail to discipline management effectively or in a timely manner. ‘‘Just vote no’’ campaigns are one mechanism for exerting external pressure on boards to act, and it is of interest to test whether this pressure is sufficient to motivate directors.

One question that arises in formulating such a test is whether disciplinary CEO turnover is plausibly an activist goal in the full sample of campaigns or whether a subsample test is more appropriate. We conduct a full sample test for two reasons. First, although we do observe targetings in which activists explicitly request a CEO change, most proponents complain more generally about management and firm performance or unresponsive or conflicted boards. Del Guercio and Hawkins (1999) in their study of public pension fund activists report that proponents tend to have broad goals for their desired firm response, even when raising a relatively narrow issue with management. They quote a CalPERS official’s defini- tion of success as ‘‘significant changes in the company (strategic plan, top management, visible attempts to increase shareholder value)’’ and that ‘‘the topic itself is not the real issue’’ (p. 303). Second, although we can eliminate observations in which CEO turnover is unlikely to be the goal of the campaign (e.g., the firm is in the middle of a CEO search, the main issue is the severance package of the outgoing CEO, or the issue is extremely narrow, such as a director’s poor attendance at board meetings), it seems more appropriate to test whether the results are stronger without this subsample than to subjectively eliminate these cases.

3.3.1. Matched control sample approach

To test whether disciplinary CEO is abnormally high in ‘‘just vote no’’ campaign targets, relative to what it would be without the campaign, we adopt a matched control sample approach. Specifically, for each campaign firm we identify a nontargeted firm with sales in the previous fiscal year within 25% of the campaign firm’s and with the closest market-adjusted stock return in the 1-year ending the December before the annual meeting. We report results using the full sample of targets, repeat our tests after dropping those without a close sales- and perfor- mance-match, and report any change in inferences.16

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D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 95

We match on sales and 1-year stock performance for three reasons. First, several studies show that CEO turn- over is highest among poorly performing firms (Warner, Watts, and Wruck, 1988; Denis and Denis, 1995). Further- more, Yermack (2004) reports that recent stock perfor- mance is the best predictor of CEO turnover, relative to accounting performance or lagged stock performance. Because campaign firms tend to be poor performers, it is important to control for performance. Second, we would like the loss of a CEO position to have the same meaning in the campaign sample and the control sample. This is more likely to be the case if positions are roughly equivalent in terms of prestige and pay, which is arguably correlated with firm size. Finally, because proponents tend to target large, poorly performing firms, by matching on these

Table 4 Comparison of firm and governance characteristics for ‘‘just vote no’’ campaign

This table reports mean and median values of firm and governance charac

campaign firm we identify a nontargeted (control) firm with sales within 25% o

closest market-adjusted stock return in the 1 year ending the December befo

measured in the fiscal year-end prior to the annual meeting. Industry-adjusted o

divided by beginning period total assets, minus the median value for the same

3-year market adjusted returns are the compounded monthly returns for the fir

the compounded monthly returns for the Center for Research in Security Pri

Institutional ownership is the number of outstanding shares owned by 13F insti

in the quarter prior to the annual meeting date of the campaign year as a perc

quarter by CRSP. We use ownership data reported in the Investor Responsib

Thomson. The Governance Index is that reported by Gompers, Ishii, and Me

provisions in place or worse overall governance. We use the latest index availab

which the indices were constructed. We then adjust the G-Index by subtracting

time period. Board member stock ownership sums stock ownership of all of the fi

proxy statements if missing. Board size and the percentage of inside directors ar

Standard & Poor’s Register, Directors, and Executives if missing. Classified board

database or from proxy statements if missing. The table reports the P-values o

campaign firms with matching control firms. ***, **, and * (a, b, and c) represent

level, respectively.

Firm or governance characteristic ‘‘Just

Mea

Prior sales (millions of dollars)

(

Prior 1-year market-adjusted return (percent)

(

Maximum percentage votes withheld (percent)

Percentage of firms with greater than 20% withheld vote

Total assets (millions of dollars) 4

(

Market value of equity (millions of dollars) 2

(

Prior industry-adjusted OROA (percent)

Change in industry-adjusted OROA from year �3 to year �1 (percent)

variables we can better capture the notion of an otherwise similar firm that was not targeted.

Table 4 contains summary statistics on firm and governance characteristics for the sample of 112 campaign firms and the 112 matching control firms. We obtain data on financial characteristics from CRSP and Compustat, governance and board data from the Investor Responsi- bility Research Center (IRRC) databases, and institutional ownership from Thomson Financial’s database of SEC 13F filings. We conduct tests of differences in means and medians and in paired differences for all ‘‘just vote no’’ campaign firms versus the matching control firms.

Although sales and 1-year stock performance are similar by construction, we also find few significant differences in other measures of firm size, such as total

firms and control firms

teristics in ‘‘just vote no’’ campaign firms and control firms. For each

f the campaign firm in the fiscal year prior to the campaign and with the

re the campaign year. The firm characteristics are from Compustat as

perating return on assets (OROA) is operating income before depreciation

two-digit primary standard industrial classification industry. The prior

m for the 36 months ending the December before the campaign year less

ces (CRSP) value-weighted market index for the corresponding period.

tutions as reported in the Securities and Exchange Commission 13F filing

entage of the total number of shares outstanding reported for the same

ility Research Center (IRRC) director database when it is missing from

trick (2003), with higher numbers indicating less shareholder-friendly

le prior to the annual meeting of the campaign year based upon dates for

the median value from the same Fama and French industry for the same

rm’s board members, using data from the IRRC director database or from

e measured the year of the campaign using the IRRC director database or

and poison pill existence is taken from the IRRC corporate governance

f tests for differences in means and medians between the ‘‘just vote no’’

significantly different from zero means (medians) at the 1%, 5%, and 10%

vote no’’ campaign firms Control firms P-values

n (median) N Mean (median) N T-test (medians test)

17,727.2 112 15,836.4 112 0.58

8,359.4) (7,994.3) (0.92)

�8.9* 112 �9.5** 112 0.93

�20.6) a (�12.8) a (0.88)

11.4 104 4.1 72 0.00

(5.8) (2.3) (0.00)

21.2% 104 1.4% 72 0.00

(0.00)

8,395.0 112 37,381.9 112 0.43

9,064.1) (10,787.0) (0.80)

6,465.6 112 24,660.6 112 0.80

5,130.1) (5,365.4) (0.74)

3.1*** 111 4.7*** 111 0.26

(1.3) a (1.3) a (0.27)

�1.6* 104 �2.1** 109 0.72

(�0.8) (0.4) (0.76)

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Table 4 (continued )

Firm or governance characteristic ‘‘Just vote no’’ campaign firms Control firms P-values

Mean (median) N Mean (median) N T-test (medians test)

Prior 3-year market-adjusted return (percent) �32.6*** 112 �18.6*** 112 0.28

(�62.7)a (�16.7) a (0.01)

Percentage of inside directors (percent) 19.9 112 24.7 112 0.01

(16.7) (21.8) (0.01)

Board size 11.6 112 11.6 112 0.91

(11) (12) (0.84)

Board member stock ownership (percent) 5.8 112 6.9 110 0.54

(1.0) (1.1) (0.93)

Institutional ownership (percent) 54.4 112 54.7 110 0.89

(57.6) (52.4) (0.76)

Governance Index 9.5 104 9.6 111 0.77

(9) (10) (0.81)

Industry-adjusted Governance Index 0.47 104 0.39 111 0.84

(0) (1) (1.00)

Percent of firms with

CEO that is also chairman of the board 83.0 112 78.6 112 0.40

(0.40)

Classified boards 55.4 112 58.0 112 0.69

(0.69)

Poison pills 52.7 112 52.7 112 1.00

(1.00)

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10396

assets and market capitalization, or other measures of performance, such as industry-adjusted operating perfor- mance or the previous 3-year change in operating performance. One exception is that the median 3-year market-adjusted stock performance is significantly lower in the campaign firms than in the control firms, although the means are not significantly different.

The mean and median percentage of votes withheld confirm our earlier inference that proponents appear to be successful at garnering withheld vote support from other shareholders, as these values are over two and one-half times higher at campaign firms than at size- and performance-matched control firms, and they are signifi- cantly different at the 1% level. In addition, 21.2% of campaign firms have a substantial showing of campaign support, as measured by a withheld vote greater than 20%, compared with 1.4% of control firms. Furthermore, from 2000 to 2003 the median percentage votes withheld is 12.6% for campaign firms and 3.2% for control firms, significantly different at the 1% level (not separately reported).

We find no significant differences in board size, board member stock ownership, institutional ownership, or the percentage of firms in which the CEO is also chairman. In addition, we find no significant differences in governance or anti-takeover provisions (poison pill, classified board, G-Index) across the two samples. However, consistent

with Bizjak and Marquette (1998), we do find that target firms tend to have a significantly lower proportion of insiders on the board than control firms. In sum, we find few differences in observable firm and governance characteristics that could be related to CEO turnover across the campaign and control samples. In our multi- variate analysis, we control directly for these measures.

3.3.2. Abnormal CEO turnover at ‘‘just vote no’’ campaign

firms: univariate results

To measure turnover we first identify the CEO and the chairman of the board (COB) in place at the time of the campaign from that year’s proxy statement (year 0). We then identify the firms with a different CEO or COB in the year after the campaign using proxy statements, and we search Lexis-Nexis and the Wall Street Journal archives for press announcements associated with these changes. We conduct an identical procedure for the matching control firms. Based on the details in the press announcements, we classify the turnover as either forced or voluntary in nature using a definition similar to Denis and Denis (1995) and Parrino (1997). Specifically, we classify the turnover as forced if the stated reason is forced resignation, conflict, or poor performance. In addition, if the announcement indicates an unexpected early retirement, or if the CEO is below the age of 60 and does not report the reason as poor

ARTICLE IN PRESS

Table 5 Alternative measure of the success of ‘‘just vote no’’ campaigns: chief executive officer (CEO) turnover at targeted firms and nontargeted control firms

This table reports the percentage of CEOs leaving targeted firms and nontargeted control firms in the year following the campaign year. We use proxy

statements and press announcements to identify whether a CEO resigns during the year following the campaign year. LexisNexis and Factiva archives are

used to identify the earliest announcement date and details about the turnover. We classify the turnover as forced if the stated reason is forced resignation

or conflict, or poor performance. In addition, if the announcement indicates an unexpected early retirement or if the CEO is below the age of 60 and does

not report the reason as poor health or the acceptance of another position, we also classify these as forced. All other turnover is classified as voluntary, or

normal, retirements. We set to missing 14 observations due to mergers, spinoffs, delisting, or death of the executive. Five additional observations are

excluded because the executive in office in year 0 is serving on an interim basis and another two are excluded because the CEO announced plans to step

down prior to the earliest campaign announcement. ***, **, and * represent significantly different from zero at the 1%, 5%, and 10% level, respectively.

CEOs of ‘‘just vote no’’

campaign targets

CEOs of

control firms

P-value for t-test of differences

in mean (median)

Number of observations 100 106

Percentage of CEOs departing within 1 year 31.0** 17.9 0.03

(0.04)

Percentage of CEOs forced to depart within 1 year 25.0*** 7.5 0.00

(0.00)

Percentage of forced CEO and chairman of the board departures

announced simultaneously within 1 year

17.0*** 1.9 0.00

(0.00)

Percentage of CEOs forced to depart within 1 year by stated reason

Overall dissatisfaction with management or board or both 30.9*** 7.9 0.00

{n ¼ 55} {n ¼ 63} (0.00)

Board ignored a majority vote on one or more shareholder proposals 15.8 5.6 0.33

{n ¼ 19} {n ¼ 18} (0.34)

Board or director lacks independence or proper oversight 21.7 8.0 0.25

{n ¼ 26} {n ¼ 25} (0.26)

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 97

health or the acceptance of another position, we also classify these as forced. To identify turnover that can reasonably be associated with the campaign, we require the announcement to be within 1 year of the annual meeting of the campaign year. We exclude 19 sample and control firm turnovers due to mergers, spinoffs, delisting, death of the executive, or because the executive in office in year 0 is serving on an interim basis. Two additional turnovers are excluded because the CEO announced plans to step down prior to the earliest campaign announce- ment. All other turnover is classified as voluntary, or normal, retirements.

Table 5 contains univariate statistics on CEO turnover rates. The 1-year CEO turnover rate in ‘‘just vote no’’ campaign firms is 31%, compared with 17.9% in the matching control firms, a difference significant at the 5% level. More revealing, the annual forced CEO turnover rate of 25% in the campaign firms is over three times greater than the 7.5% for their matching controls (significant at the 1% level) and over 12 times as great as the 2% annual rate typical in the general population of firms (Denis and Denis, 1995; Fich and Shivdasani, 2006; Huson, Parrino, and Starks, 2001; Jenter and Kanaan, 2006; Kaplan and Minton, 2006). Even more striking is the difference between the two samples in the frequency of an executive being forced to resign both CEO and COB positions simultaneously. The forced resignation of the offices of CEO and COB occurs in only 1.9% of control firms and at a rate nearly nine times higher (17%) in campaign firms, significantly different at the 1% level.

We argue that campaigns with a stated reason of overall dissatisfaction are at firms where shareholders are most unhappy with past firm performance and manage- rial decisions. Thus, we would expect to also see that this category is most strongly associated with disciplinary CEO

turnover. The bottom rows of Table 5 report forced CEO turnover rates by stated reason. In the overall dissatisfac- tion stated reason category, 30.9% of campaign firms have forced CEO turnover within 1 year of the campaign, compared with 7.9% of their matching control firms, a difference significant at the 1% level. The other stated reason categories also show higher forced turnover rates in campaign firms but are not significantly different from their matching control firms. In unreported tests, we find that the same pattern applies to the rates of simultaneous resignations of the CEO and COB positions, significantly higher joint departure rates only at the firms targeted for overall dissatisfaction with management or the board, or both.

3.4. Abnormal CEO turnover at ‘‘just vote no’’ campaign

firms: probit results and robustness tests

In the univariate tests of Section 3.3.2, we show that the rate of disciplinary CEO turnover in the year following a campaign is more than three times higher than in the size- and performance-matched control sample. In this section, we confirm the ‘‘just vote no’’ campaign effect in a multivariate test and describe various robustness checks of this result. Table 6 contains a probit analysis of forced CEO turnover, in which the dependent variable is equal to one if the firm experiences forced CEO turnover within 1 year and zero otherwise. We control for CEO age, tenure, and the number of directorships held in other public companies, using data from the IRRC director database or proxy statements in the year of the campaign. Following Yermack (2004), we control for market-adjusted stock returns in the year prior to the campaign. We also include the change in institutional ownership in the 2 years prior

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Table 6 Predicting forced chief executive officer (CEO) turnover

This table contains probit regression estimates of the probability of forced CEO turnover at a firm within 1 year following a ‘‘just vote no’’ campaign. The

sample contains the 206 campaign and control observations described in Table 5. CEO tenure is obtained from a firm’s proxy statement, while age and the

number of other directorships are from the Investor Responsibility Research Center director database, supplemented by the firm’s proxy statement when

necessary. The prior 1-year market-adjusted stock return is computed as the 12-month compounded stock return ending the December prior to the

campaign year less the Center for Research in Security Prices value-weighted return over the corresponding period. Prior 2-year change in institutional

ownership is equal to proportion of shares held by 13f institutions eight quarters prior to the annual meeting less the proportion of shares held by 13f

institutions the quarter just prior to the year 0 annual meeting. Institutional ownership is obtained from Thomson Financial. The dummy variable

withheld vote greater than 20% equals one when the maximum vote withheld at a firm is greater than 20%. Dummy variables indicating the type of ‘‘just

vote no’’ campaign, broad-based or focused, or the stated reason or proponent type use the category definitions described in Table 1. P-values, reflecting

robust standard errors, are in parentheses. ***, **, and * (a, b, and c) represent significantly different from zero means (medians) at the 1%, 5%, and 10%

level, respectively.

Independent variable Dependent variable equals one if CEO turnover is classified as forced in the year

following the campaign

(1) (2) (3) (4) (5) (6)

Constant �1.28 �1.28 �1.92 �2.05* �1.78 �1.77

(0.26) (0.26) (0.12) (0.10) (0.13) (0.14)

CEO age �0.01 �0.01 0.01 0.01 0.00 0.00

(0.77) (0.77) (0.81) (0.73) (0.91) (0.90)

CEO tenure �0.01 �0.01 �0.01 �0.01 �0.02 �0.01

(0.37) (0.36) (0.42) (0.41) (0.33) (0.46)

Number of other directorships held in campaign year 0.08 0.08 0.09 0.09 0.10 0.09

(0.36) (0.36) (0.35) (0.35) (0.30) (0.36)

Market-adjusted stock return, year �1 to 0 �1.00*** �1.00*** �0.95*** �0.94*** �1.09*** �0.91***

(0.01) (0.01) (0.01) (0.01) (0.00) (0.01)

Change in institutional ownership, year �2 to 0 �2.62*** �2.67*** �2.62*** �2.59***

(0.01) (0.01) (0.01) (0.01)

‘‘Just vote no’’ campaign dummy 0.79***

(0.00)

Broad-based campaign dummy 0.79*** 0.68*** 0.64***

(0.00) (0.01) (0.01)

Focused campaign dummy 0.79** 0.78** 0.72*

(0.02) (0.05) (0.08)

Withheld vote greater than 20% dummy 0.21

(0.56)

Reason stated is overall dissatisfaction with management dummy 0.70***

(0.01)

Reason stated is ignored majority vote dummy 0.31

(0.42)

Reason stated is lack of independence or oversight dummy 1.05***

(0.01)

Public pension fund proponent dummy 0.74***

(0.01)

Investment group proponent dummy 0.81*

(0.10)

Joint sponsorship proponent dummy 0.49

(0.26)

Other proponent dummy 0.75

(0.11)

N 204 204 195 195 195 195

Pseudo-R2 (percent) 13.1 13.1 16.4 16.5 17.5 16.6

Prob 4Chi2 0.00 0.00 0.00 0.00 0.00 0.01

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–10398

to the annual meeting to control for any additional pressure on the board resulting from institutional selling activity, given the findings of Parrino, Sias, and Starks (2003).

The remaining independent variables are indicator variables for a ‘‘just vote no’’ campaign, whether the firm’s entire board is targeted with a broad-based campaign, whether individual directors are targeted by name in a focused campaign, whether any of the firm’s directors had 20% or more of the votes cast withheld toward her election, and whether the campaign has a

particular stated reason or proponent type. We also repeat the specifications after deleting campaign firms without a close sales and performance match (unreported) and report any inferences that change below.

The coefficients on the control variables are consistent with the literature. Forced CEO turnover is more likely when market-adjusted performance is poorer and institu- tional selling is greater. Specifications (1) and (2) show that firms with ‘‘just vote no’’ campaigns are significantly more likely to experience forced CEO turnover than control firms and that the effect is similar whether the

ARTICLE IN PRESS

17 In the interest of brevity, these results are not reported but are

available upon request. The blockholder data are from Dlugosz,

Fahlenbrach, Gompers, and Metrick (2006), available on Andrew

Metrick’s website.

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 99

campaign is broad-based or focused. Including institu- tional selling as a control variable reduces the number of available observations, but the campaign indicators, especially for broad-based campaigns, remain strongly significant, suggesting that both institutional activism and institutional voting with their feet exert independent pressure on boards. In unreported tests, we find that the broad-based campaign indicator remains significant in the subsample of targets with close matches, while the focused campaign indicator does not. Column (4) shows that the significance of the broad-based campaign indicator remains strong when we control for whether the campaign had a strong showing of greater than 20% withheld votes, although the voting outcome dummy itself is not significant. In unreported tests, we find that a continuous measure of vote outcome or various other outcome thresholds (e.g., 30% or higher withheld vote dummy) are never significant.

Column (5) includes a specification that includes indicator variables for the stated reason for the campaign. With the exception of the ignored majority vote stated reason indicator, the coefficients are all significant at the 1% level and similar in magnitude, with similar results in the subsample of close matches. Thus, stated dissatisfac- tion with management or with the oversight and independence of the board is strongly associated with a higher probability of forced CEO turnover after controlling for other factors. The specification in Column (6) includes proponent type indicators and shows that public pension funds and investment groups are positively associated with forced CEO turnover, although the investment group coefficient is only marginally significant and is not robust to the subsample of close matches. Joint sponsorship by multiple types and ‘‘other’’ campaign proponent indica- tors are never significant. We also find these effects to be economically significant, as the marginal effects (not reported) suggest that forced CEO turnover is 15 percen- tage points more likely when proponents launch a broad- based campaign, 17 percentage points more likely when the firm is targeted by public pension funds, and 16 and 29 percentage points more likely when targeted for overall dissatisfaction with management and for poor oversight or director independence, respectively.

In Table 6, the dependent variable is an indicator variable for forced CEO turnover, in which observations with either no CEO turnover or voluntary turnover are pooled, instead of being treated as separate outcomes. If we relax this assumption using a multinomial logit specification (unreported), we find similar results. We also include the firm and governance characteristics of Table 4 as alternative control variables (e.g., board stock ownership, percentage of insiders on the board, etc.) with no change in inferences. In addition, if we repeat the specifications deleting observations in which CEO turn- over is unlikely to be the proponent’s goal (e.g., the main issue is the severance package of the outgoing CEO), we find even stronger results. Finally, our inferences do not change if we run the same specifications in the 1990–1996 and 1997–2003 periods separately.

In sum, the association between ‘‘just vote no’’ campaigns and disciplinary CEO turnover is highly

significant and robust to alternative specifications, defini- tions of the control variables (e.g., 1-year change in institutional ownership, prior 3-year abnormal stock performance, post-1-year abnormal stock performance, or accounting performance), and time periods. Among subsamples, the strongest and most robust results are for broad-based campaigns, those sponsored by public pen- sion funds, and those in which the proponent expresses overall dissatisfaction with management and the board. Notably, the campaigns most robustly related to abnormal disciplinary CEO turnover are of the type advocated by Grundfest (1993), broad-based campaigns motivated by performance issues.

3.4.1. Is forced CEO turnover at campaign firms driven by

other external or internal pressures?

The results of the previous two subsections are consistent with the hypothesis that ‘‘just vote no’’ campaigns prod the board of directors to fire an under- performing CEO. While we have made every attempt to control for other influences on disciplinary CEO turnover in the regressions and through our matched sample approach, the observed relation could be driven by other exogenous omitted factors that are coincident with campaigns. For example, concurrent changes in the composition of the board of directors, or pressure from blockholders other than campaign proponents, could be the true drivers behind the observed board response. Alternatively, campaign proponents could be attracted to firms that have other ongoing activist pressure or other signals that shareholders are unified in their desire for change at the firm. Although Smith (1996), Karpoff, Malatesta, and Walkling (1996), and Del Guercio and Hawkins (1999) find no relation between CEO turnover and firms targeted with a shareholder proposal, these studies examine the period prior to 1993. Shareholder proposals could have become more effective in recent years, as it has become much more common for a shareholder proposal to receive majority vote support (Thomas and Cotter, 2007).

To explore these possibilities, we add several variables to the probit specifications in Table 6: the percentage of new directors joining the board in the year of the campaign, percentage director turnover from year �1 to 0, the presence of one or more 5% blockholders, and whether a firm received a shareholder proposal with majority vote support in either the same year or the year prior to a campaign (using information from the Council of Institutional Investors’ website). We find that our results are not sensitive to including any of these variables.17

As a further check, we examine all announcements in Lexis-Nexis and the Wall Street Journal in the year prior to the disciplinary CEO turnover announcement to identify other potential precipitating events or evidence of external pressure at these firms. We find no evidence

ARTICLE IN PRESS

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103100

that campaign firms have a greater amount of external monitoring events than control firms. Of the three cases of blockholder pressure that we identify in campaign firms, two are also the proponent of the ‘‘just vote no’’ campaign. Thus, the campaign appears to be another tool in the arsenal for these activist blockholders. Furthermore, our results are robust to dropping three firms with either a shareholder lawsuit, blockholder pressure from a noncampaign proponent, or a takeover rumor. Overall, we conclude that disciplinary CEO turn- over is abnormally high at ‘‘just vote no’’ campaign firms and that it is unlikely that this result is driven by other sources of external or internal pressure on the board to act.

3.5. Wealth and operating performance effects of forced CEO

turnover

In this section we more directly test whether the disciplinary CEO turnover associated with ‘‘just vote no’’ campaigns is in the interests of all of the firm’s share- holders, as opposed to the interests of the activist shareholders. Jenter and Kanaan (2006) and Fisman, Khurana, and Rhodes-Kropf (2005) argue that CEO dismissals resulting from activist pressure are not always in shareholders’ interests. For example, if shareholders misattribute poor firm performance to the CEO when the poor performance was out of her control (e.g., due to an industry downturn), the board should resist pressure from activist shareholders. We test these notions by examining the wealth effects at the announcement of forced CEO turnover and the change in adjusted OROA for the subsample of target firms with forced CEO turnover in the 1 year after the campaign. If a misguided activist agitates a board that responds by firing the CEO, even though the value-maximizing response was to retain her, then we should not observe both a positive stock price reaction to and improvements in operating performance following the announcement of this dismissal.

Table 7, Panel A contains the results of a standard event study on the CEO turnover announcements that we identify from the earliest press announcement in the Lexis-Nexis and the Wall Street Journal archives. We estimate market model parameters over the same event window as Denis and Denis (1995), the 250-day period beginning 2 days following the announcement. The post- event estimation period reflects the fact that the stock performance in the pre-event period is very poor for most of the sample. We report average and median CARs over two event windows, the pre-announcement period (�251, �2) and the 2-day announcement period (�1, 0).

Similar to the CEO turnover literature, we find significantly negative and economically large average abnormal returns of �43% in the pre-event period. In contrast, for the 2-day CAR at the CEO turnover announce- ment we find a mean abnormal return of 2.5% and a median abnormal return of 2.9%, significant at the 1% and 5% level, respectively. In addition, 64% of these CARs are positive, suggesting that wealth effects are positive for the majority of these turnovers.

Table 7, Panel B contains changes in adjusted operating performance results for partitions of target firms with and without forced CEO turnover. We find economically and statistically significant abnormal increases in mean and median industry- and performance-adjusted operat- ing OROA of 6.3 and 4.1 percentage points, respectively, at target firms with forced CEO turnover within 1 year of a campaign, with both measures significant at the 1% level. Analogous statistics reported in Denis and Denis (1995) and Huson, Malatesta, and Parrino (2004) suggest that this is a large effect. They find magnitudes ranging from 1 to 5 percentage points on average, depending on the sample period. Further, we find that the post-campaign change in industry- and performance-adjusted OROA in targets with forced CEO turnover is significantly different from other campaign targets that do not experience forced CEO turnover. Together, these results are consistent with the hypothesis that ‘‘just vote no’’ campaigns motivate boards to fire underperforming CEOs and replace them with higher quality managers, suggesting that the non- activist shareholders of campaign targets benefit when activists are successful.

3.6. Operating performance effects when forced CEO

turnover does not occur

Table 3 shows that ‘‘just vote no’’ campaigns motivated by activists’ overall dissatisfaction with the decisions and strategy of management are associated with significant operating improvements. We also show that this category of stated reason is associated with abnormal disciplinary CEO turnover, which in turn is associated with positive and significant wealth effects and operating improve- ments. One question that remains is whether the operat- ing improvements are confined to the targets with disciplinary CEO turnover, which the bottom row of Table 7, Panel B might suggest. That is, if ‘‘just vote no’’ campaigns prod boards into taking actions consistent with shareholders’ interests, it follows that in some cases those interests are best served by firing the CEO, while in other cases, alternative outcomes might be more appropriate. Thus, we would like to know whether boards targeted for the overall dissatisfaction stated reason that choose not to fire the CEO take other performance-improving actions.

Table 7, Panel C contains changes in adjusted operating performance results for target firms without forced CEO turnover, partitioned by stated reason. We find economic- ally and statistically significant abnormal increases in mean industry- and performance-adjusted operating OROA of 3 percentage points at target firms with an overall dissatisfaction stated reason, although the median is positive but not significant. In contrast, the mean and median are insignificant for the other stated reasons category. Thus, although the statistics are weaker when targets with forced CEO turnover are excluded from the overall dissatisfaction stated reason category, we still find support for these campaigns being associated with mean- ingful operating improvements. Consistent with this, out of 48 overall dissatisfaction targets without forced CEO turnover, 13 (27%) make corporate governance reforms

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Table 7 Stock price reaction to forced chief executive officer (CEO) turnover announcements and change in operating return on assets (OROA) surrounding ‘‘just

vote no’’ campaigns

Panel A contains average cumulative abnormal returns (CARs) for forced CEO turnover announcements within 1 year of a ‘‘just vote no’’ campaign from

1990 to 2003 identified from the earliest press announcement of CEO turnover in the Lexis-Nexis and the Wall Street Journal archives. We estimate market

model parameters in the 250-day period beginning two days following the announcement. We report average CARs over two event windows, the pre-

announcement period (�251, �2), and the 2-day announcement period (�1, 0). Median CARs are in parentheses and the percentage of CARs that are

positive are in brackets. The table reports the results of significance tests using the cross-sectional t-statistic of Boehmer, Musumeci, and Poulsen (1991) to

control for event-induced increase in the variance of the abnormal returns around the announcement. ***, **, and * indicate significantly different from

zero at the 1%, 5%, and 10% level, respectively, for this test. a, b, and c indicate significantly different from zero at the 1%, 5%, and 10% level, respectively,

using the standardized residual test in Patell (1976). Panel B contains the same statistics as in Table 3, but partitioned on whether or not forced CEO

turnover occurred within 1 year of the campaign. Panel C contains the same statistics as in Table 3, but includes only campaign target firms that did not

have forced CEO turnover within 1 year. The sample is then partitioned on whether or not the proponent’s stated reason is overall dissatisfaction. Thus,

Panel C further partitions the sample in the bottom row of Panel B.

Panel A. Stock price reaction to forced CEO turnover announcements

Forced CEO turnover sample Pre-announcement (�251, �2) Two-day announcement (�1, 0)

‘‘Just vote no’’ campaign firms n ¼ 25 �42.75%***,a 2.52% **.a

(�40.28) *** (2.88) **

[20.0] [64.0]

Change in operating return on assets

Industry- and

performance-

adjusted

Industry-

adjusted

Level of

OROA

Industry- and

performance-

adjusted

Industry-

adjusted

P-value for difference in

medians for sub-sample

versus rest of sample for

Column 4 (Column 5)1 2 3 4 5

(year �3 to �1) (year �3 to �1) (year �1) (year �1 to +3) (year �1 to +3)

Panel B. Change in operating return on assets surrounding ‘‘just vote no’’ campaigns

Targets with forced

CEO turnover in

year after campaign

�1.63 �2.22 9.59 6.29*** 6.41**

(�0.27) (�0.83) (9.69) (4.10)a (2.40) b 0.04

[47.8] [39.1] {n ¼ 25} [76.0] [68.0] (0.07)

{n ¼ 23} {n ¼ 23} {n ¼ 25} {n ¼ 25}

Targets with no

forced CEO

turnover in year

after campaign

�1.01 �1.46 13.31 2.22 0.31

(0.18) (�0.72) (12.06) (0.60) (�0.47)

[50.6] [45.7] {n ¼ 86} [52.0] [48.1]

{n ¼ 81} {n ¼ 81} {n ¼ 77} {n ¼ 77}

Panel C. Change in operating return on assets surrounding ‘‘just vote no’’ campaigns with no forced CEO turnover within 1 year

Targets with no forced CEO turnover in year after campaign

Stated reason is

overall

dissatisfaction with

management or

board or both

1.12 �2.50* 10.78 3.03* 2.64*

(1.31) (�2.01) c (9.49) (0.89) (2.48) b 0.18

[55.8] [32.6] {n ¼ 48} [58.5] [63.4] (0.01)

{n ¼ 43} {n ¼ 43} {n ¼ 41} {n ¼ 41}

Other stated

reasons �3.42 �0.28 15.61 1.29 �2.36

(�0.40) (1.22) (16.36) (�1.17) (�2.11) c

[44.7] [60.5] {n ¼ 38} [44.4] [30.6]

{n ¼ 38} {n ¼ 38} {n ¼ 36} {n ¼ 36}

D. Del Guercio et al. / Journal of Financial Economics 90 (2008) 84–103 101

and, perhaps more important, 24 (50%) have a significant strategic action within 1 year of the campaign.18

As further support, we note that this category contains seven out of the nine targets with missing operating performance data in the post-campaign period. Of the seven, six are missing because the target was subse- quently acquired or merged within 1 year of the

18 Of these strategic actions, 13 are major firm restructurings such as

asset sales, six are selling to an acquirer, three are major board or

management changes, and two are hiring an outside advisor to formally

evaluate alternative strategies such as separating existing business lines.

campaign. We find that the mean and median 2-day CAR at the first announcement of these six acquisitions or mergers is an economically and statistically significant 6.9% and 2.1%, respectively (not reported). This suggests that the shareholders of these targets benefited and that the post-campaign operating performance improvement of targets without forced turnover in the overall dissatisfaction stated reason category is likely under- stated. In sum, operating performance improvements are widespread in the firms targeted by activists for firm- specific performance reasons, and they are not exclusively driven by the targets with forced CEO turnover. Boards

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appear to respond to activists’ concerns in a variety of ways, and our overall results are consistent with these responses being in shareholders’ interests.

4. Conclusion

Like a Rule 14a-8 shareholder proposal, a ‘‘just vote no’’ campaign is a low-cost but nonbinding tool for activists to pressure underperforming firms to make decisions in shareholders’ interests. Unlike shareholder proposals, however, campaigns have the potential to shine the spotlight on individual directors and thereby have more potential to compel boards to act. This paper contributes to the debate on whether existing shareholder activist tools are sufficient to prod boards of directors into action.

Using a comprehensive sample of publicly announced ‘‘just vote no’’ campaigns from 1990 to 2003, we find robust evidence consistent with activists being effective in prodding boards to either fire an underperforming CEO or to take other actions consistent with shareholders’ interests. Operating improvements subsequent to cam- paigns and positive and significant stock price reactions to announcements of CEO resignations and mergers within 1 year confirm that these changes are value enhancing.

We find the most consistent evidence that ‘‘just vote no’’ campaigns are effective in aligning directors and share- holders’ interests in the campaigns motivated by firm- specific strategy and performance issues. These campaigns are significantly associated with disciplinary CEO turnover and, most important, with economically and statistically significant operating improvements. In contrast, campaigns motivated more by general corporate governance principles have insignificant changes in operating performance. Given the low cost of these campaigns, however, activists could be content that the performance of these targets do not deteriorate further or that the board complies with the specific request, such as removing the CEO from the compensation committee. Activists could also reap unmea- sured benefits from potential spillover effects, whereby other nontargeted firms in their portfolio pro-actively make governance structure changes to avoid being targeted.

We conclude that the selective use of ‘‘just vote no’’ campaigns is an effective activist tool despite the nonbind- ing nature of withholding votes, suggesting that share- holders have sufficient power to hold directors accountable under the current proxy rules. Given that the more costly forms of activism are primarily confined to the smaller- capitalization segment of the market (e.g., Bebchuk, 2007; Brav, Jiang, Partnoy, and Thomas, 2008), the capital markets benefit from the low-cost disciplinary effects of shame and embarrassment. Because the power of the media and public opinion is most effective when directors have the most to lose, our evidence suggests that ‘‘just vote no’’ campaigns are an especially useful tool in the prestigious and well- compensated board rooms of the very largest public firms.

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